Demand, Supply and Price PDF

Demand, Supply and Price Stiglitz, Walsh Economics Chapter MI3 The Role of Prices ◼ Prices are how agents in the economy communicate. ◼ Prices provide information and incentive. ◼ Prices measure scarcity. ◼ Changes in prices are determined by changes in supply and demand....

Demand, Supply and Price Stiglitz, Walsh Economics Chapter MI3 The Role of Prices ◼ Prices are how agents in the economy communicate. ◼ Prices provide information and incentive. ◼ Prices measure scarcity. ◼ Changes in prices are determined by changes in supply and demand. Demand, Supply and Price lecture by Veronika Miťková 2 The Individual Demand Curve ◼ Demand is the quantity of a good or service purchased at a given price. ◼ The demand curve shows the quantity of the good demanded at each price. Demand, Supply and Price lecture by Veronika Miťková 3 The Individual Demand Curve ◼ As price falls, the quantity demanded increases; the demand curve has a negative slope. Demand, Supply and Price lecture by Veronika Miťková 4 The Market Demand Curve ◼ The market demand curve gives the total quantity of the good that will be demanded at each price. ◼ It is the horizontal sum of the demand curves of all individuals. ◼ As the price rises, the market demand decreases: ◼ the demand of individuals decreases ◼ consumers exit the market Demand, Supply and Price lecture by Veronika Miťková 5 The Market Demand Curve Demand, Supply and Price lecture by Veronika Miťková 6 Sources of Shifts in Demand Curves Economic factors: ◼ Income ◼ Prices of related goods ◼ An increase in the price of substitutes increases demand; the demand curve shifts right. ◼ An increase in the price of complements decreases demand; the demand curve shifts left. Demand, Supply and Price lecture by Veronika Miťková 7 Sources of Shifts in Demand Curves Non-economic factors: ◼ Tastes ◼ Demographics ◼ Information ◼ Availability of credit ◼ A change in expectations Demand, Supply and Price lecture by Veronika Miťková 8 Income ◼ an increase in income increases the demand for most goods - the demand curve shifts to the right Demand, Supply and Price lecture by Veronika Miťková 9 Tastes ◼ changes in preferences causes shifts of the demand curve (low-cholesterol foods, child care) Demographic Changes ◼ demographic structure of the society changes the demand (baby diapers, new houses) Demand, Supply and Price lecture by Veronika Miťková 10 Information ◼ new information may change the demand of consumers (improved consumer information about health risks) Credibility ◼ some goods are usually available on loans - when the interest rate rises borrowing money is more expensive and the demand decreases (houses, cars) Demand, Supply and Price lecture by Veronika Miťková 11 Expectations ◼ if consumers expect an income to decrease, they reduce their spending and decrease current consumption ◼ if consumers expect increase in prices, their current demand increasing Demand, Supply and Price lecture by Veronika Miťková 12 Shifts in a Curve versus Movements along a Curve ◼ a change in price is represented by a movement along a curve ◼ all other changes that affect demand and supply will shift the curve Demand, Supply and Price lecture by Veronika Miťková 13 Fundamentals of Demand, Supply and Price 1 ◼ Demand declines as price rises. Demand, Supply and Price lecture by Veronika Miťková 14 A Firm’s Supply ◼ Supply is the quantity of a good or service that a household or firm would lie to sell at a particular price. ◼ The supply curve shows the quantity of the good supplied at each price. Demand, Supply and Price lecture by Veronika Miťková 15 A Firm’s Supply ◼ As the price increases a firm is willing to produce more; the supply curve has a positive slope. Demand, Supply and Price lecture by Veronika Miťková 16 The Market Supply Curve ◼ The market supply curve gives the total quantity of a good that all firms in the economy are willing to produce at each price. ◼ As the price rises, the market supply rises: ◼ each firm supplies more of the good ◼ some additional firms enter the market Demand, Supply and Price lecture by Veronika Miťková 17 The Market Supply Curve Demand, Supply and Price lecture by Veronika Miťková 18 Sources of Shifts in Supply Curves ◼ prices of inputs ◼ technology ◼ natural environment ◼ availability of credit ◼ expectations Demand, Supply and Price lecture by Veronika Miťková 19 Fundamentals of Demand, Supply and Price 2 ◼ Supply increases as price rises. Demand, Supply and Price lecture by Veronika Miťková 20 Equilibrium ◼ Equilibrium describes a situation where there are no forces (reasons) for change. ◼ In a market in equilibrium, neither demanders nor suppliers have an incentive to change their actions. ◼ Demand and supply work together to determine the market price in competitive markets. Demand, Supply and Price lecture by Veronika Miťková 21 Equilibrium ◼ At the equilibrium price, consumers get precisely the quantity of the good they are willing to buy at that price, and producers sell precisely the quantity they are willing to sell at that price. DEMAND = SUPPLY ◼ The market clears → market clearing price. Demand, Supply and Price lecture by Veronika Miťková 22 Equilibrium ◼ Equilibrium occurs at the intersection of the demand and supply curves, at point E0. Demand, Supply and Price lecture by Veronika Miťková 23 Law of Supply and Demand ◼ At equilibrium, no purchases and no supplier has an incentive to change the price or quantity. ◼ In competitive market economies, actual prices tend to be the equilibrium prices at which demand equals supply. Demand, Supply and Price lecture by Veronika Miťková 24 Excess Supply ◼ Suppliers cannot sell all they wish, so they the cut price. ◼ Quantity demanded increases along the demand curve – E0. ◼ Quantity supplied decreases along the supply curve – E0. ◼ Excess supply causes prices to fall. Demand, Supply and Price lecture by Veronika Miťková 25 Excess Demand ◼ Consumers cannot buy as much as they want, so they bid up the price. ◼ Quantity supplied increases along the supply curve to – E0. ◼ Quantity demanded decreases along the demand curve – E0. ◼ Excess demand causes prices to rise. Demand, Supply and Price lecture by Veronika Miťková 26 Using Demand and Supply Curves ◼ assume that sugar becomes more expensive ◼ the supply curve of the candy bars shifts to the left ◼ lower quantity ◼ higher price Demand, Supply and Price lecture by Veronika Miťková 27 Using Demand and Supply Curves ◼ assume that consumers become more health conscious ◼ the demand curve of the candy bars shifts to the left ◼ lower quantity ◼ lower price Demand, Supply and Price lecture by Veronika Miťková 28 Fundamentals of Demand, Supply and Price 3 ◼ The market clears at the equilibrium price. Demand, Supply and Price lecture by Veronika Miťková 29 Price, Value, and Cost ◼ Price does not reflect importance but supply and demand conditions. ◼ Water and diamond paradox. ◼ Price is not identical to cost but they are related. ◼ Price is what an item sells for. ◼ Cost is the expense of making an item. Demand, Supply and Price lecture by Veronika Miťková 30